What MSFT Should Do With YHOO (Now)

Posted: April 25, 2008 in Technology and Business
I may be missing something… but I just don’t get why everyone says Microsoft has to raise its offer to buy Yahoo.
 
YHOO has aggressively tried to find alternative buyers and got exactly 0 bidders.
 
I’ll take it one step farther:  It would be irresponsible to MSFT shareholders for MSFT to not walk right now… not if doing so could eventually mean a substantially lower purchase price (which was pretty damn high to start with… have to wonder what MSFT was even thinking).
 
I get there are morale issues any way you turn.  Doesn’t matter, those are short-term if the situation is handled correctly.
 
To wit, here’s what should happen now:
 
*  MSFT walks (bid too high in the first place)
*  YHOO tumbles to teens
*  YHOO drifts lower, possibly into high single digits
*  MSFT re-bids at mid-to-high teens in an all-stock deal (why this originally wasn’t an all-stock deal baffles me)
*  With some of the $15-$20+ billion it is saving, it creates killer-can’t-turn-down stock grants for key YHOO employees (whose options haven’t appreciated in years)
*  MSFT gives YHOO the reins and a lot of juice and tells them to go (try to) kill GOOG
*  MSFT gets what it wants:  YHOO properties, somebody much better managing their online activities, and happy & incented YHOO employees
*  MSFT stock (which YHOO shareholders now hold) goes up and makes MSFT and YHOO shareholders happy
 
Figuring this all out doesn’t seem so difficult to me. <smile>
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Comments
  1. William says:

    Nice to find your blog Royal.  I agree that the above would be the rational course of action, but I am not sure that Kevin Johnson and Ballmer is still operating in this region.   It seems to me that the rational thought process would have been to focus on the three main lines of business (Windows, Office, and server) and gradually move them to the service model.  Why MS is so concerned about competing with Google on the ads market is beyond understanding, given that it has no previous relevant experience operating in the space.I can only assume that it\’s in the MS culture to compete, and they are seeing red over the money GOOG is raking in.

  2. Royal Farros says:

    Nice to have you aboard. <smile>
     
    Microsoft used to think this way.  It\’s taken them a long time to come to inevitable conclusions and that\’s why they\’re so behind.
     
    Here are the connections: 
     
    (1)  Microsoft (and the world) consider search is software.  And software is what MSFT does.  So, yes, not dominating such a huge area of software runs counter to MSFT culture.
     
    (2)  MSFT dominates software, which has a total market size of about $300-$400 billion a year.  The market has obviously matured and, thus, their growth prospects.  But, it turns out the advertising market is $400-$600 billion a year.  And the software part of it — driven by search — is growing like crazy.  They don\’t have a choice if they want to stay relevant.
     
    (3)  MSFT is smart enough to know that advertising (even software focused advertising like search) is not in their blood.  I think that\’s why they want YHOO — essentially, YHOO becomes their outsourced ad division — Redmond turns over the whole shooting match to them so they can concentrate on what they like (Windows, Office, Server, virtual machines, etc.).
     
    You can always count on MSFT to have a cake-and-eat-it-too mentality. <smile>
     

  3. William says:

    I generally agree with your points, with the exception that I make a fundamental distinction between advertising and search.  Perhaps thru MS\’s lens they are one and the same, as the number one threat on both counts is GOOG.  But that does not necessarily needs to be the case.  The whole ad biz model has only been successful in the last five years, and maybe someone like Facebook\’s model will end up taking a sizable share of ad dollars.  Not to mention people like Salesforce and Zoho are doing a fine business challenging some vertical MS turf, that has nothing to do with ads or search.  By focusing so narrowly on GOOG they risk being exposed on other fronts; but alas zeroing in the top competitor is very much in MS\’s blood :-)In your third point that YHOO may well be Redmond\’s Ad division, do you see YHOO being the consumer traffic generator only?  Or do you see them taking on the aQuantive properties such as Razor Fish/AvenueA, Atlas and the like?  And do you think turning it all over to YHOO changes the dynamics with GOOG?If they do intend to turn over to YHOO to run the show, Ballmer must have alot more confidence in YHOO\’s management than I do.  And going hostile may not be the best way to retain that set of people.

  4. Royal Farros says:

    I guess never say never but even if new things pop up, it\’s hard to imagine an Internet without some kind of search.
     
    If I was MSFT and I bought YHOO, I see YHOO doing everything it\’s doing today — plus anything else to help it catch GOOG… or more precisely, to make money.  YHOO has, "hey, there\’s a pixel, let\’s monetize it!" in its blood… that\’s what\’s missing at MSFT.  And, yes, they should run everything associated with content & advertising on the web.
     
    Yes, turning it over does change the dynamics with GOOG.  Can\’t help but.  The world wants this anyhow, it\’s no fun for all the buyers to buy from a single supplier.
     
    Re:  YHOO mgmt:  I think I\’m more worried about location than anything.  Everything in Redmond is Windows/Office/Server centric.  Won\’t help if they get crushed by those priorities (like MSN does today).
     
    Hey, you just gave me a great idea for a post… stay tuned!
     
    Re: Hostile:  It\’s easy to go hostile if MSFT simultaneously announces killer retention packages.  In that situation, the key employees would actually push to make it happen, believe it or not.